India's Economic Crisis: Nature and Remedies

Bakul H Dholakia

It is now widely recognized that the Indian economy

has been facing a major economic crisis with the situa-
tion deteriorating rapidly since August 1990. While the
present economic crisis has been the result of a gradual
accumulation of the combined effect of various forces
operating in the economy during the last decade, its
symptoms have become clearly noticeable after January
1991 with the country's foreign exchange reserves drop-
Currently, the Indian economy is passing ping sharply to the lowest level ever of Rs 1,877 crores,
which is barely enough to finance the country's imports
through a severe crisis which is due to an for 13 days only. It is hardly surprising, therefore, that
accumulation of the combined effect of considerable attention is being devoted to the analysis
various forces operating in the domestic as of India's economic crisis in order to generate ap-
well as the global economy. propriate policy options and instruments to pull the
country out of the crisis.
In this article," Bakul H Dholakia analyses A critical analysis of the Indian situation shows that
the major elements of the present economic the major elements of the present economic crisis are as
crisis such as foreign exchange crunch, fiscal follows:
imbalances and high rate of inflation and
• the deepening foreign exchange crisis
suggests various long-term measures for
bringing the economy on even keel. • growing fiscal imbalances
• increasing rate of inflation
• slackening of overall economic growth
• deceleration in industrial growth.

Bakul H Dholakia is Professor in the Economics The Foreign Exchange Crisis

Area of the Indian Institute of Management, The intensity of the foreign exchange crisis is brought
Ahmedabad. out by the following indicators:
• There has been a sharp decline in foreign exchange
reserves from the level of Rs 8,151 crores in March
1987 to Rs 1,877 crores in early January 1991 (Table
1). While the stand-by IMF loan of Rs 3,275 crores
in the third week of January 1991 has temporarily
boosted our foreign exchange reserves, the declin
ing trend in the forex reserves has continued un
abated during the subsequent period. Thus, the
country's foreign exchange reserves have again
dropped to Rs 2,620 crores as of May 17,1991.
• Although the country always had a sizeable trade
deficit during the eighties, the level of trade deficit
has increased sharply during 1990-91 to cross the
Rs 10,000 crore mark for the first time in Indian

Vol.16, No.3, July-September 1991 47

economic history (Table 2). Thus, the average level of Table 2: Trends in India's Trade Deficit
trade deficit which used to be around Rs 650 crores (Rs Crores)
per month during 1988-89 and 1989-90 has now Year Exports Imports Trade Monthly
increased to around Rs 900 crores per month. At this Deficit Average Deficit
rate, the stand-by IMF loan availed in January
would not last long, even after taking into account 1980-81 6,711 12,549 5,838 487
small adhoc loans that we have been able to obtain (4.6%) (37.3%) (114.2%)
after January 1991. Hence there is an urgent need to 1981-82 7,806 13,608 5,802 484
raise enough short-term credit at the earliest. (16.3%) (8.4%) (-0.6%)
• There has been a significant deterioration in India's 1982-83 8,803 14,293 5,490 458
credit rating especially during the last few months. (12.8%) (5.0%) (-5.4%)
This has led to a decline in the availability of short-term 1983-84 9,771 15,831 6,060 505
credit even on relatively more stringent terms and (11.0%) (10.8%) (10.4%)
conditions, thereby further accentuating the problem 1984-85 11,744 17.134 5,390 449
of financing the country's monthly import (20.2%) (8.2%) (-11.1%)
requirements. 1985-86 10,895 19,658 8,763 730
(-7.2%) (14.7%) (62.6%)
Table 1: Trends in India's Foreign Exchange 1986-87 12,452 20.0% 7,644 637
Reserves (Rs Crores) (14.3%) (2.2%) (-12.8%)
1987-88 15,741 22,399 6,658 555
(26.4%) (11.5%) (-12.9%)
1988-89 20,295 28,194 7,899 658
Month & Year Foreign No. of Weeks No. of Months
(28.9%) (25.9%) (18.6%)
Exchange of Imports of Trade Deficit Reserves
Covered by Covered Forex by Forex Reserves
1989-90 27,681 35,412 7,731 644
Reserves (36.4%) (25.6%) (-2.1%)
1990-91 32,527 43,171 10,644 887
(17.5%) (21.9%) (37.7%)
March, 1980 5,934 34 26
March, 1981 5,544 23 11 Figures in parentheses indicate percentage changes over the
March, 1982 4,024 15 8 previous year.
March, 1983 4,782 17 10 Sources: 1. Economic Survey 1989-90, Ministry of Finance,
March, 1984 5,972 20 12 Government of India, March 1990.
March, 1985 7,243 22 16 2. Provisional Estimates of India's Foreign Trade
March, 1986 7,820 21 11 released by Ministry of Commerce, Government
March, 1987 8,151 21 13 of India, May 1991.
March, 1988 7,687 19 14
March, 1989 7,040 13 11 grade level to what is known as the speculative grade
March, 1990 5,331 8 8 for the first time. If a similar downgrading by JBRI takes
January 1991 1,877 2 2
May 1991 2,620 3 3 place in the near future, it would have very serious
implications for India's plans of raising short-term as
Sources : (1) Economic Survey 1989-90, Ministry of Finance, well as long-term loans from the Japanese market. Cur-
Government of India. rently, almost two-thirds of India's total foreign ex-
(2) Information provided by the Finance Ministry change borrowing from the commercial markets is from
in May 1991. Japan and the remaining one-third is from European
and American markets. It may be noted that the main
In September 1990, the US credit rating agency reasons given by various credit rating agencies for
Standard and Poor had for the first time placed India at downgrading India's rating include the impact of the
BBB, which is the lowest rung of investment grade in its Gulf crisis on the Indian economy, dwindling foreign
rating scale. Subsequently, in the last week of March exchange reserves, spiralling foreign debt and the rela-
1991, the Japanese Bond Research Institute (JBRI) as tively long spell of political uncertainties which affected
well as Moody' s Investors' Service (another major the government's capacity to deal effectively with its
credit rating agency in the US) lowered India's credit external financial obligations. India's foreign debt as of
ratings to the lowest level in the investment grade. In March 1990 rose to 70 billion US dollars. About $ 4
the last week of May 1991, Standard and Poor further billion of this amount is a fast-revolving short-term debt
reduced India's credit rating from the last investment
48 Vikalpa
on which the country is struggling to avoid default. In Similarly, the growth rate of industrial production has
fact, the seriousness of the problem is evident from also declined from 8.8% in 1988-89 to around 7.5% in
some of the recent actions on India's part like selling 20 1990-91. Moreover, while the average rate of inflation
tonnes of gold in Zurich during the last week of May during the period 1980 to 1989 was around 6.4% per
1991 in a desperate bid to raise the steadily declining annum, this increased sharply to 11.3% during 1990-91.
level of foreign exchange reserves and thereby ensure All these factors clearly indicate the deepening
that the country would be able to meet its debt service economic crisis faced by the country.
obligations without any default at least during the
month of June 1991. Whether the present foreign exchange crisis can be
regarded mainly as a short-term liquidity problem or it
Fiscal Imbalances also represents the more serious problem of long-term
solvency is the critical issue at this juncture. It is evident
A high degree of fiscal imbalance has emerged as from an analysis of the nature of the economic crisis that
another major problem facing the Indian economy the present crisis faced by the Indian economy cannot
especially after 1986. The latter half of the eighties has be viewed only as a short-term problem of liquidity.
been marked not only by high and growing budget The strategy to deal with the present economic crisis
deficits, but also by attempts on the part of the govern- has, therefore, to focus both on the short-term measures
ment to create a surplus in the capital account to finance to solve the immediate liquidity problem and also
its revenue deficit. This unhealthy tendency of borrow- simultaneously to initiate the process of bringing about
ing money to finance current consumption expenditure long-term changes that would effectively eliminate the
of the government reached an alarming proportion in basic factors contributing to such crisis. The only viable
1990-91 when the revised estimates of revenue deficit long-term strategy to overcome the present economic
turned out to be Rs 17,585 crores, while the overall crisis is to achieve rapid economic growth with exports
budget deficit was reported to be Rs 10,772 crores, growing significantly faster than imports and general
indicating a net surplus of Rs 6,813 crores on capital price level rising very slowly. While this was the char-
account. Moreover, the fiscal deficit, which represents acteristic feature of the economy during the latter half
the actual difference between aggregate government of eighties, the trend has suddenly been reversed in
expenditure and current revenue reached the highest 1990-91 which saw imports growing far more rapidly
ever level of Rs 43,331 crores in 1990-91 (Table 3). Thus, than exports coupled with a down turn in overall
in the year 1990-91, nearly two-fifths of the revenue economic growth and a high rate of inflation.
deficit has been financed by capital account surplus and
the size of overall fiscal deficit has turned out to be as Macroeconomic Strengths and
high as 8.6% of GDP. Weaknesses
Table 3: Trends in Deficit Financing
(Rs Crores) The silver lining in the dark clouds of the deepening
Year Revenue Budget Fiscal economic crisis is represented by the basic strengths
Deficit Deficit • Deficit acquired by the Indian economy during the eighties.
1987-88 9,137 5,815 27,881 Even the severest critics of India's macroeconomic
1988-89 10,515 5,642 30,920 management during the eighties have to admit that the
1989-90 11,912 10,592 35,630 Indian economy had acquired a strong growth orienta-
1990-91 (RE) 17,585 10,772 43,331 tion and had succeeded in shifting to a higher path of
1991-92(BE) 17,766 9,977 38,475 long-term economic growth during this period.
Moreover, the economy had developed much greater
Source: Interim Budget for 1991-92, March 18,1991. resilience to weather fluctuations, enabling the country
Other major problems faced by the Indian economy to achieve self-sufficiency in food grains and the build-
especially during the last two years are declining ing up of adequate buffer stocks of food grains. The
growth rates of GDP as well as industrial production country had also achieved a significant increase in the
and a rising rate of inflation. The Indian economy grew annual growth rates of exports, especially in the latter
at an average rate of 5.5% per annum during the period part of the eighties as compared to the earlier period. A
1980 to 1989 as against the average rate of 3.5% per strong and fairly well diversified industrial base had
annum during the previous three decades. However, been built up. The climate for industrial investment had
the growth rate of GDP has declined to 4.5% in 1989-90 improved considerably with the latter part of eighties
and it is unlikely to exceed that level during 1990-91. showing a remarkable buoyancy. Given these inherent

Vol.16, No.3, July-September 1991 49

strengths of the economy, it would be imprudent to Table 4: Trends in the Exchange Rate of Indian
have an entirely pessimistic outlook on the country's Rupee
future. (Base 1980 = 100)
Year& Index of Index of Index of Real
The major weaknesses of the Indian economy, Month Nominal Effective Effective
which have emerged during the latter half of the Effective Relative Exchange Rate
eighties, are the growing pressure on balance of pay- Exchange Rate Price
ments, steadily mounting foreign debt, structural im- 1981 96.10 105.08 100.98
balance in the pattern of industrial growth, persistent 1982 94.85 103.86 98.51
fiscal imbalance, stagnation in the overall savings rate, 1983 87.24 110.76 96.63
continuing pressure on the price level and vulnerability 1984 84.60 117.31 9924
of the economy to external shocks like the Gulf crisis. 1985 78.15 122.87 96.02
The Prime Minister's Economic Advisory Council (then 1986 64.84 133.73 86.71
chaired by the late Prof. Sukhamoy Chakravarty) had 1987 57.27 141.61 81.10
pointed out many of these problem areas in some of its 1988 50.65 149.67 75.81
earlier reports prepared during 1987-89. The sharp in- 1989 45.62 154.02 70.26
1990 43.19 160.49 69.32
crease in the intensity of some of these problem areas April 1990 42.73 158.18 67.59
has actually led to the present economic crisis. December 1990 43.15 163.35 71.35

Following the second oil price shock of 1979-80, Source: The Economic Times, May 17,1991.
India's foreign trade deficit increased sharply to 4.4% of
GDP in 1980-81. This, coupled with the severe drought In mid-eighties, the country's credit worthiness
of 1979-80, would have led to a major economic crisis in was rated very highly by international agencies and this
early eighties. However, it could be effectively avoided facilitated large scale external commercial borrowing to
because of three reasons: (a) There was a reduction in finance the country's growing trade deficit. During the
oil imports which was made possible by a significant period 1980-1989, the country's external commercial
increase in indigenous oil production-from Bombay borrowing (including suppliers credit) increased sharp-
High; (b) a sizeable proportion of the country's trade ly from Rs 4,146 crores to Rs 17,482 crores. It is only
deficit was offset by increasing levels of private remit- natural that such a phenomenal increase in external
tances from Indian workers in the oil exporting borrowing coupled with slow growth of exports during
countries; and (c) the government took recourse to a the first half of the eighties would lead to a steep in-
programme of external commercial borrowing as well crease in the relative debt service burden. Thus, the ratio
as a large Extended Fund Facility (EFF) loan from the of debt service obligations on medium and long-term
IMF to tide over the balance of payments problems. debt to aggregate current receipts (exports plus gross
While these measures could avoid a major economic invisible earnings) increased from 9.2% in 1980-81 to
crisis in the early eighties, the seeds of the present around 23% by 1989. Moreover, between the first half
economic crisis were perhaps sown precisely during of the eighties (Sixth Plan period) and the second half
that period. That was mainly because our export per- of the eighties (Seventh Plan period), the pattern of
formance during the Sixth Plan period (1980-1985) was financing current account deficit changed drastically. In
dismal, the average growth rate of export volume being the Sixth Plan period, the current account deficit was
less than 3% per annum. As a result, by 1985-86, the ratio financed largely by net capital flows from official agen-
of exports to imports had fallen to the lowest ever level cies such as the World Bank, IMF and bilateral donor
of 54%. As it is now widely recognized, one of the agencies. As against this, during the Seventh Plan
factors contributing to this situation was the conserva- period, current account deficit was being financed in-
tive exchange rate policy followed during the period creasingly by funds from commercial sources mainly in
1980-85. During this period, the nominal effective ex- the form of external commercial borrowing and non-
change rate declined by just around 20%, while the real resident deposits. This shift in the pattern of financing
effective exchange rate remained almost unchanged the current account deficit coupled with a significant
(Table 4). Thus, the Indian currency almost maintained increase in the level of trade deficit itself led to a sharp
its relatively overvalued level during the first half of the deterioration in India's external balance.
eighties, and in the process we failed to take advantage It is interesting to note that the Chakravarty Com-
of the opportunities for increasing our exports sig- mittee, which prepared a detailed report on the current
nificantly given a relatively favourable global economic economic situation for consideration by the then newly
environment during that period. elected National Front Government in December 1989,

50 Vikalpa
expressed concern over the deterioration in the of payments adjustment, without either generating a
country's external balance but did not envisage the recession of the intensity that the IMF package would
serious crisis that the economy could plunge into in the result in or cutting welfare expenditures."
near future. The Chakravarty Committee felt that,
"While rising trends in India's external debt and debt It appears that there is some confusion here be-
service constitute serious cause for concern, the situa- tween the short-term and the long-term aspects of the
tion is not one that threatens immediately the solvency present economic crisis and the remedial action re-
or credit worthiness of the country."1 However, the quired to tackle it. While policy measures designed to
Committee report drew specific attention to two crucial curb imports during the first half of the current financial
factors which have contributed to the mounting pres- year (1991-92) as a means to ease short-term liquidity
sure on our balance of payments, viz., (a) the fiscal and problems are justifiable in terms of sound economic
trade policy structure which has provided incentives reasoning, the permanent use of this method as a long-
for import intensive industrialization catering to term solution to the country's balance of payments
protected domestic markets; and (b) growing average problem seems absurd especially in the light of the
import intensity of aggregate exports on account of a existing economic structure. Today, many of our exist-
more rapid increase in exports having relatively greater ing industries are dependent on the import of raw
import content. It has been argued that both these fac- materials for their regular production. The available
tors are the consequences of the policies of economic information indicates that the list of industries where
liberalization pursued during the eighties. import content in raw materials consumed exceeds 25%
includes important industries like chemicals, man-
Strategy based on Leftist View made fibres, fertilizers, pharmaceuticals, paints, tex-
tiles, cables, paper, mini steel, consumer electronics,
The strategy to deal with the present economic crisis gems and jewelry, etc. Some of these industries cater
and to restore the healthy growth of the economy predominantly to the requirements of the common man
should be derived on the basis of an objective evalua- and some of them are export oriented. Moreover, most
tion of the available alternatives in the light of the of these industries have high growth potential. Hence,
existing circumstances. permanent curbs on import of raw materials, as sug-
gested by the Leftist view, would retard the long-term
However, in practice, macroeconomic strategy for- growth of such industries and seriously affect their
mulation invariably gets linked with political capacity utilization, which would in turn lead to reces-
ideologies. A classic example of this is provided by the sion coupled with a decline in overall cost efficiency.
policy prescriptions suggested by a group of Left
Economists in a statement adopted at a recent seminar. Similarly, a high level of fiscal deficit arises partly
They have recommended that the appropriate method on account of transfer payments to various social
for curbing the balance of payments deficit would be groups through open or hidden subsidies. The burden
through direct curbs on imports. Moreover, they argue of these subsidies is ultimately borne by the productive
that the government should not opt for a significant cut sectors of the economy and it finally results in an in-
in the fiscal deficit because major cuts in fiscal deficits creased cost in these sectors, which makes their
would plunge the economy into a deep recession. Thus, products less competitive abroad and simultaneously
according to the group of Left Economists, "Opting limits the growth of demand for such products in the
solely for a reduction in the fiscal deficit and that too domestic market. Moreover, high budget deficits occur-
through a cut in capital expenditures, as appears likely ring year after year create severe inflationary pressures,
under IMF pressure, will not only push the economy which also produce the same effect. Thus, there is an
into a recession immediately, but also adversely affect urgent need to reduce the size of the fiscal deficit and
future growth prospects. In our view the government correct the fiscal imbalance at this juncture and the
should opt for a much smaller cut in the fiscal deficit questioning of this policy prescription by the Leftist
than the two per cent reportedly suggested by the IMF view seems to be devoid of any sound economic reason-
and actually proposed by the Finance Minister." The ing. In fact, it is most likely that in the long run the
main conclusion drawn by the Left Economists from Leftist prescription of import curbs on industrial raw
their analysis of the present economic crisis is as fol- materials and maintenance of high fiscal deficits would
lows: "Resort to a second IMF loan is not the only option adversely affect the growth of industrial production in
available to the country. Rather, through a combination general and the growth of exports in particular. This
of a stricter import regime and appropriate budgetary would in effect worsen the country's balance of pay-
policies, the country can achieve the required balance ment problem instead of solving it.

Vol.16, No.3, July-September 1991 51

 The serious concern expressed by Left economists, This would require, among other things, improved
which is also often shared by others, that the con- access to critical, imported raw materials and
ditionalities attached to the IMF loan imply a substan- streamlining of various export incentives. The past
tial loss of freedom for the country with regard to its experience shows that relatively faster growth of
socio-economic policy formulation deserves to be ex- exports has been experienced by those industries
amined carefully. During the last couple of years, which had ready access to imported inputs at inter-
detailed country-wise studies have been made by the national prices.
IMF itself to evaluate the experience of applying stand- • Export incentives should be linked to a much
ard stabilization packages to a wide range of less greater extent with net exports rather than gross
developed countries. These studies have revealed many exports, i.e., exports less import content of exports.
shortcomings of the basic IMF approach of imposing a This would ensure relatively faster growth of value
uniform set of conditionalities. As a result, it is now added exports and also simultaneously encourage
increasingly recognized that in designing structural ad- internationally competitive import substitution.
justment programmes, theory has to be blended with • There is a need to pursue more vigorously the
specific political, cultural and socio-economic cir- policy of depreciation of the real effective exchange
cumstances prevailing in individual countries. In this rate. The newly elected Congress-I government has
connection, recent developments in IMF policies, par- already taken a significant step in this direction in
ticularly those concerning social safety nets, deserve the first week of July 1991 by depreciating the
specific mention. Similarly, the extent of flexibility that Rupee by more than 18% against major international
the IMF has shown in recent times while dealing with currencies. A depreciation of this magnitude was
complex issues relating to exchange rate management perhaps overdue especially in view of high rates of
also clearly suggests that the IMF is perhaps not so rigid inflation experienced by the Indian economy
now with regard to the application of a standard during the last two years. It is interesting to note
stabilization package as it used to be in the past. As a here that during the period April- December 1990,
result, there is much greater scope now for meaningful the real effective exchange rate of the Rupee had in
and effective negotiations as well as mutual under- fact gone up by about 5.5% (Table 4) and this period
standing on the programme of economic policy reforms was also marked by a sudden sluggishness in
between the IMF and the Indian government. India's exports. As against this, the earlier period
Moreover, it also needs to be noted that during the last (1986-89) was marked by a significant decline in
couple of years consensus seems to be emerging among real effective exchange rate coupled with sig-
the Indian policy makers on various aspects of nificant increase in exports measured in terms of US
economic liberalization and related policy reforms. dollars. The analysis of time series data on India's
Some of these reforms, which the Indian government exports (in US dollars) and index of real effective
may decide to implement in any case, are likely to form exchange rate for the period 1980-81 to 1990-91
a part of the usual conditionalities associated with the shows that one per cent decline in real effective
IMF loan and to that extent any fear regarding the exchange rate of the rupee leads to 1.8% increase in
country losing freedom of economic policy formula- the volume of exports. Hence, at this juncture, it is
tion in the process of seeking IMF loan does not appear necessary to follow the policy of steady deprecia-
to be well founded. tion of the Rupee at a rate higher than the average
differential between the domestic and the interna-
Strategy for Macroeconomic Turnaround tional inflation rates. Such effective depreciation of
Indian Rupee in real terms would lead to a sig-
In the light of the above discussion, we may now ex- nificant improvement in the competitiveness of
amine the macroeconomic strategy for dealing with India's exports and at the same time also improve
India's economic crisis. The main ingredients of a the viability of several import substitution projects
strategy designed to lift the Indian economy out of the which in turn could result in a reduction in import
present crisis in order to achieve an effective macro- intensity in Indian manufacturing.
economic turnaround could be as follows: • There is a need to focus urgently on the turnaround
• The profitability of our exports should be sys- of loss making public enterprises. Privatization of
tematically improved, so that selling in the domes- loss making public enterprises would not yield sig-
tic market does not necessarily remain more nificant financial returns and, hence, it may not be
profitable than selling in the international market, of much help in reducing fiscal deficit in the near
as is the case today in many domestic industries. future. In the case of financially viable public
enterprises, there is a need to facilitate their growth

52 Vikalpa
 through export oriented modernization and expan- the present situation in which the opportunities for
sion programmes. Moreover, it is necessary that short- term commercial borrowings have dried up and
more and more public enterprises are asked to FCNR accounts have also failed to bring any significant
finance the bulk of their current import require- net inflow, what is urgently required is a sizeable
ments through direct export earnings. In 1989-90, medium-term bridge loan of around 5 to 7 billion US
the total import of raw materials and components Dollars to avoid the possibility of any serious repay-
by central public enterprises was Rs 12,977 crores, ment crisis cropping up in the next couple of years.
whereas their aggregate export earnings were only Since short-term reliefs that can be provided by the
half of that amount (Rs 6,366 crores). This measure funds available from donor countries like the US, Japan,
would simultaneously ease the pressure on balance UK, France and Germany or international agencies like
of payments and contribute to a reduction in fiscal the World Bank and the Asian Development Bank are
deficit. not likely to add up to the required amount, such adhoc
• There is a need to decrease the ratio of government reliefs can basically serve the purpose of providing
expenditure to GDP by ensuring that the percent some cushion to tide over the financial problems for a
age change in government consumption expendi few months. However, such cushion would not last
ture is significantly less than the expected long enough to enable the country to design and imple-
percentage change in GDP (measured at current ment a package of major policy changes that could lead
prices). Curbing excessive growth of government to a successful macroeconomic turnaround over the
consumption expenditure is perhaps a more effec next few years. Hence, tapping such sources for getting
small additional funding cannot be considered as an
tive remedy to overcome the present crisis than
effective alternative to obtaining a large medium-term
curbing import of raw materials by potentially ex
loan as early as possible.
port oriented industries. Moreover, there is a need
to reduce the food and fertilizer subsidy and this Similarly, the recent measures such as higher bank
could be achieved by operating the public distribu margins on LCs, revision of interest rates for export
tion system only for the poor and by introducing credit and modifications in the clearance procedures for
dual pricing system for fertilizers. large transactions by Forex dealers also belong to the
• There is a need to accord top priority to improving category of adhoc fire fighting measures aimed primari-
the performance of basic infrastructure sectors such ly at easing the immediate liquidity problem. It is evi-
as railways, coal, power and steel. While these sec dent that such measures cannot be expected to provide
tors have performed reasonably well during the lasting solutions to the current economic crisis. In fact,
latter half of the eighties, their performance has some of these measures, if continued over a longer
deteriorated significantly since 1989. The down period, may adversely affect our export performance in
turn in industrial growth experienced in 1990-91 is the coming years. In view of this, in the present cir-
partly due to the inadequate performance of in cumstances, there is apparently no effective alternative
frastructure sectors. to approaching IMF for a large medium-term loan to
resolve the problem of liquidity crunch over a period
• While an additional dose of taxation in the short run long enough to allow the economy to achieve a success-
appears to be unavoidable, significant emphasis ful turnaround. At this juncture, the IMF loan appears
also needs to be placed on stepping up and stream to be more like a necessary condition to overcome the
lining the tax collection effort in the areas of both present economic crisis. Whether it would also turn out
direct as well as indirect taxes. This aspect assumes to be a sufficient condition or not depends essentially
special significance in the context of a reported upon the manner in which we reformulate our
shortfall of more than Rs.1,000 crores in tax collec economic strategy and the degree of success that we
tion during 1990-91. It is evident, therefore, that achieve in its speedy implementation during the next
better tax administration can contribute significant few years.
ly in achieving the required reduction in the budget
deficit. References
1. Report of the Economic Advisory Council on the Current
Conclusion Economic Situation and Priority Areas for Action, Minis
try of Finance, Government of India, December 1989,
In addition to the long-term policy measures mentioned P12.
above to restore the economy on the path of rapid and 2. Seminar on Economic Policies organized by the Left Par
healthy economic growth, it is equally necessary to ties, New Delhi, February 22-24, 1991. The statement
resolve the immediate problem of liquidity crunch aris- adopted at this Seminar has been published in
ing out of the accumulated liability of mounting short- Mainstream, March 9, 1991 and also in The Business and
Political Observer, May 14,1991.
term debt that has to be repaid in the near future. Given

Vol.16, No.3, July-September 1991 53